Rev. Rul. 79-434

ISSUE

Does the transfer by a corporation, previously engaged in a manufacturing business, of its assets (cash and short-term Treasury notes) for stock of a regulated investment company qualify as a reorganization under section 368(a)(1) of the Internal Revenue Code?

FACTS

Corporation X, a corporation engaged in manufacturing, sold all of its assets to unrelated corporation Z for $1,000x cash This sale was made in anticipation of X's acquisition by corporation Y, an open-end diversified investment company that qualifies as a regulated investment company as that term is defined in section 851 of the Code. Pursuant to an agreement between X and Y, X transferred all of its assets (cash and short-term Treasury notes that X had purchased with the proceeds from the sale of its assets) to Y in return for 1,000 shares of Y. As provided in the agreement, X dissolved after the transfer and distributed the stock of Y to its shareholders, individuals A and B, in exchange for their X stock.

LAW AND ANALYSIS

A tax-free reorganization assumes that "the new enterprise, the new corporate structure, and the new property are substantially continuations of the old [ones] still unliquidated." Section 1.1002-1(c) of the Income Tax Regulations. To exclude transactions that are not within the intended scope of a reorganization, the specifications of a reorganization are precise. A reorganization must satisfy both the terms of the specifications and their underlying assumptions. Section 1.368-1(b). Thus, section 368 of the Code does not apply to a transaction that "upon its face is outside the plain intent of the statute." See, Gregory v. Helvering, 293 U.S. 465 at 470 (1935). For example, a transaction that in substance is a mere sale of assets is not a reorganization. See, section 1.368-1(b) and Cortland Specialty Co. v. Commissioner, 60 F.2d 937 (2d Cir.), cert. denied, 288 U.S. 599 (1932). Similarly, a transaction that in substance is a mere purchase by one corporation of stock in another corporation is not a reorganization.

HOLDING

The transfer of cash or short-term Treasury notes for stock does not qualify as a reorganization under section 368(a)(1) of the Code because in substance it represents a purchase by X of the shares of Y prior to X's liquidation.

The fair market value of the Y stock distributed by X to its shareholders in complete liquidation will be treated as in full payment in exchange for their X stock under section 331 of the Code. Gain or loss is recognized to the shareholders of X under section 1001.